Professional Indemnity FAQ

Excesses - Costs Exclusive or Cost Inclusive

What is the difference between a “Costs Exclusive” Excess or a “Costs Inclusive” Excess?

When we look at an excess described as Costs Exclusive, we are actually saying that the excess will only apply to the actual settlement of a claim as opposed to a costs inclusive excess which means the excess applies to both the legal costs and the settlement.

The end result should mean that the end result is the same, you pay the excess. Where there is a benefit with a costs exclusive excess is in the timing of when it gets paid (at the timing of settlement) and even better if the matter is successfully defended and there is no settlement. No excess is then paid.

So from this point of view, a “costs exclusive” excess is much better to have but is not always available for most occupations or with most insurers.

Its availability also has a lot to do with market cycles and competition. For instance, the Accounting profession is very competitive at the moment and will offer it, but hard to find for engineers. In a soft market it seems everyone offers a “costs exclusive” excess while in hard market it is a rarity.

A skilled Broker must point out at renewal time if the excess has reverted to “Costs Inclusive” or seek to negotiate with the current insurer its retention. Not pointing out this change will get the Broker into trouble.

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A new report – called "Show Me The Money!" by insurer XL Catlin and law firm Wotton + Kearney – is the second in a series of three white papers on securities class actions and their impact on the Directors & Officers Liability (D&O) market. The main conclusion is that Directors’ and officers’ (D&O) insurance premiums are under-priced significantly and need to rise strongly to restore profitability. The main risk areas are those exposed to securities class actions, 

It says Directors & Officer's Side A, Side B and Side C cover has been chronically underpriced since at least 2011, while the frequency of class actions is increasing as more plaintiff lawyers and litigation funders enter the space.

The analysis suggests last year’s overall premium pool of about $210 million would need to increase by at least three times to establish a profitable market, if it is assumed all other factors stay unchanged.

“Recent market developments would indicate most D&O insurers are now endeavouring to restore some semblance of profitability to their portfolios after years of market losses,” the report says.

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